Eberts v. Goderstad, 06-3629.

• Decision Date: 29 June 2009
• Docket Number: No. 06-3629.,06-3629.
• Parties: Eric G. EBERTS and Deborah R. Eberts, Plaintiffs, v. Torge GODERSTAD, Svetlana Goderstad, also known as Suzanne Goderstad, and National Plastics Trading Company, Incorporated, Defendants-Appellants, v. American Family Mutual Insurance Company, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

569 F.3d 757

Eric G. EBERTS and Deborah R. Eberts, Plaintiffs, v. Torge GODERSTAD, Svetlana Goderstad, also known as Suzanne Goderstad, and National Plastics Trading Company, Incorporated, Defendants-Appellants, v. American Family Mutual Insurance Company, Defendant-Appellee.

No. 06-3629.

United States Court of Appeals, Seventh Circuit.

Argued April 7, 2008.

Decided June 29, 2009.

Stacy E. Ertz, Murnane Brandt, St. Paul, MN, for Plaintiffs.

Philip A. Munroe (argued), Direnzo & Bomier, Neenah, WI, Terry J. Booth (argued), Fellows, Piper & Schmidt, Milwaukee, WI, for Defendants-Appellants.

Before RIPPLE, WILLIAMS, and SYKES, Circuit Judges.

SYKES, Circuit Judge.

This case arises from the sale of an expensive and historic home in Neenah, Wisconsin. After moving in, the buyers discovered numerous defects in the home and sued the sellers in federal district court for breach of contract, various forms of misrepresentation, and negligence. The present appeal is limited to a dispute about insurance coverage — specifically, whether the sellers' insurer has a duty to defend the sellers under the terms of several insurance policies, all of which provide defense-and-indemnity coverage for "property damage" caused by an "occurrence," which is defined in the policies as an "accident." The district court, sitting in diversity and applying Wisconsin law, held there was no duty to defend, entered summary judgment for the insurer, and certified the no-coverage judgment as final for purposes of an immediate appeal under Rule 54(b) of the Federal Rules of Civil Procedure.

In their briefs and at oral argument, the sellers maintained that their insurer's duty to defend was triggered by the allegations in two of the claims in the underlying lawsuit: a fraudulent misrepresentation claim under section 100.18 of the Wisconsin Statutes and a common-law negligent misrepresentation claim. The Wisconsin Supreme Court's intervening decision in Stuart v. Weisflog's Showroom Gallery, Inc. ("Stuart II"), 2008 WI 86, 311 Wis.2d 492, 753 N.W.2d 448 (2008),¹ has eliminated the first of these arguments, as the sellers have conceded. As to the remaining argument, we conclude that the buyers' claim for negligent misrepresentation does not allege "property damage" caused by an "accident." Accordingly, the insurer owes no duty to defend, and we affirm the judgment of the district court.

I. Background

Torge and Svetlana Goderstad owned a vintage 19th century home in Neenah, Wisconsin, and in 1996-1997 they enlarged it with a 4,000 square-foot addition. In 2003 they sold the home to Eric and Deborah Eberts for $1.85 million. The Ebertses took occupancy in August 2003 and by November began to notice defects in the exterior insulation and finishing work in the addition, which led to water leaks and moisture entrapment between the home's interior and exterior walls. These and other defects in the home prompted the Ebertses to sue the Goderstads and their home-based business, National Plastics Trading Co., Inc., in the United States District Court for the Eastern District of Wisconsin; the Goderstads had since moved to Colorado, and the suit invoked the court's diversity jurisdiction. The complaint alleged seven claims for relief under Wisconsin law: (1) breach of contract; (2) intentional misrepresentation; (3) a claim under Wis. Stat. § 895.80(1)² for violation of Wisconsin's criminal theft statute, Wis. Stat. § 943.20; (4) strict-responsibility misrepresentation; (5) fraudulent misrepresentation in violation of § 100.18, which prohibits false, deceptive, or misleading representations in the sale of real estate; (6) negligent misrepresentation; and (7) negligence.

American Family Mutual Insurance Co., the Goderstads' insurer under several policies, appointed counsel for the Goderstads under a reservation of rights, see Estate of Sustache v. Am. Family Mut. Ins. Co., 2008 WI 87, ¶ 25, 311 Wis.2d 548, ¶ 25, 751 N.W.2d 845, ¶ 25 (2008), and moved to intervene under Rule 24(a) of the Federal Rules of Civil Procedure in order to protect its interest in the lawsuit. The district court allowed the intervention and on American Family's motion, agreed to bifurcate the issues of liability and coverage.

American Family then moved for summary judgment on the coverage issue, which the district court granted. Applying Wisconsin law, the court held that none of the Ebertses' claims were covered under any of the Goderstads' policies and therefore the insurer had no continuing duty to defend. The district court then certified its judgment under Rule 54(b) of the Federal Rules of Civil Procedure to satisfy the final-judgment rule and permit immediate review. 28 U.S.C. § 1291; FED. R. CIV. P. 54(b). In its current posture, therefore, this case comes to us as the Goderstads versus American Family, with the Goderstads as the appellants, opposing their insurer's early exit from the suit.

II. Discussion

A. The American Family Policies and Applicable Insurance-Law Principles

The Goderstads and National Plastics were covered under four American Family insurance policies during the relevant time period — a homeowner's policy, an umbrella liability policy, and two business policies — the relevant portions of which are not materially different. Each policy provides coverage for "property damage" caused by an "occurrence." As is usually the case, "occurrence" is defined in the policies as an "accident," but the term "accident" is otherwise left undefined. Wisconsin caselaw provides several alternative definitions, all of which attempt to capture the fortuity principle central to liability insurance. Lucterhand v. Granite Microsystems, Inc., 564 F.3d 809, 812-13 (7th Cir.2009). An "accident" for purposes of liability insurance coverage is "[a]n unexpected, undesirable event or an unforeseen incident which is characterized by a lack of intention." Everson v. Lorenz, 2005 WI 51, ¶ 15, 280 Wis.2d 1, ¶ 15, 695 N.W.2d 298, ¶ 15 (2005) (internal quotation marks omitted). "`The word "accident," in accident policies, means an event which takes place without one's foresight or expectation. A result, though unexpected, is not an accident; the means or cause must be accidental.'" Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 2004 WI 2, ¶ 37, 268 Wis.2d 16, ¶ 37, 673 N.W.2d 65, ¶ 37 (2004) (quoting BLACK'S LAW DICTIONARY 15 (7th ed.1999)).

American Family will owe a continuing duty to defend the Goderstads if the allegations in the Ebertses' complaint raise the possibility of coverage under the foregoing policy language. Lucterhand, 564 F.3d at 811; Wausau Tile, Inc. v. County Concrete Corp., 226 Wis.2d 235, 593 N.W.2d 445, 459 (1999) ("[T]he duty to defend hinges on the nature, not the merits, of the claim."); see also Doyle v. Engelke, 219 Wis.2d 277, 580 N.W.2d 245, 248 (1998). On appeal, the Goderstads have focused on just two of the seven claims in the underlying suit; they contend that the claim for fraudulent misrepresentation under § 100.18 and the claim for negligent misrepresentation fall potentially within their policies' coverages.³

B. Everson and the Court of Appeals' Opinion in Stuart

The parties' initial briefing and oral argument concentrated largely on the interplay between the Wisconsin Supreme Court's 2005 decision in Everson v. Lorenz, 2005 WI 51, 280 Wis.2d 1, 695 N.W.2d 298 (2005), and the Wisconsin Court of Appeals' decision the following year in Stuart v. Weisflog's Showroom Gallery, Inc., 2006 WI App 184, 296 Wis.2d 249, 722 N.W.2d 766 (2006). At issue in Everson was whether a commercial general liability policy provided coverage for claims of strict-responsibility and/or negligent misrepresentation. 2005 WI 51, ¶ 11, 280 Wis.2d 1, 695 N.W.2d 298. The plaintiffs, Paul and Michelle Everson, purchased a residential lot in a subdivision developed by the defendant, Richard Lorenz, unaware that their lot was within the boundary of a 100-year flood plain. Lorenz had provided the Eversons with a list of the lots partially within the flood plain, but the list erroneously designated lot 21 instead of lot 31 as among those affected. That is, lot 31 — the parcel the Eversons purchased — was mistakenly designated as lot 21 on the list, making it appear that lot 31 was not in the flood plain. The Eversons sued Lorenz for strict responsibility and negligent misrepresentation.⁴

Like the policies at issue here, Lorenz's insurance policy covered only losses caused by an "occurrence," defined as "an accident." The supreme court held that Lorenz's insurer was not obligated to defend the misrepresentation claims. Using the definition of "accident" we have set forth above, the court concluded that Lorenz's misrepresentation about the lot "cannot be considered an `accident' for purposes of ... liability insurance coverage." Id. ¶ 18, 695 N.W.2d 298. The court noted that "[t]o be liable, Lorenz must have asserted a false statement, and such an assertion requires a degree of volition inconsistent with the term accident. Although this assertion may be prompted by negligence, it is nevertheless devoid of any suggestion of accident." Id. ¶ 19, 695 N.W.2d 298 (citation omitted). Thus, the court viewed the "degree of volition" inherent in the making of a false factual statement as incompatible with the common understanding of the term "accident." Accordingly, the court concluded that Lorenz's insurance policy did not cover the strict-responsibility and negligent misrepresentation claims asserted in the underlying complaint. Id. ¶¶ 19-20. This was so even though Lorenz did not intend to deceive the Eversons when he made the false statement but was merely alleged to have been negligent as to — or strictly responsible for — the statement's falsity. Id. ¶ 22, 695 N.W.2d 298.

Everson scotches insurance coverage for most misrepresentation claims where the policy in question limits coverage to losses caused by "occurrences," meaning "accidents" — as many liability policies do. Almost...